If it makes you’re feeling any higher, it’s not simply you—a lot of retirees are in the identical scenario. Why does this occur, and what are you able to do about it?

Earnings tax on retirement advantages

When you’re an worker, your employer should withhold payroll tax at supply. In case you have no different revenue, deductions or credit, in idea, you should not have any tax owing nor a tax refund whenever you file your tax return in April.

In observe, most individuals have tax deductions that cut back their taxable revenue, or tax credit that cut back their tax owing. Each result in tax refunds, and that is why most Canadian taxpayers get a refund when submitting tax returns throughout their working years.

In retirement, the scenario is totally different. For one, taxpayers are likely to have a number of streams of revenue. In case you have a defined benefit pension, for instance, the tax withholding relies on the presumption that it’s the solely revenue supply you will have for the 12 months. Consequently, when you have different revenue from part-time work, rental revenue or taxable non-registered investments, the tax withheld on the pension will typically be too low.

As well as, some forms of revenue would not have any withholding tax. For instance:

1. Canada Pension Plan (CPP): There isn’t a withholding tax required to your CPP payments. If you would like voluntary tax withheld, you may point out this whenever you apply for CPP or in a while as properly. So, it’s not a one-time choice.
2. Previous Age Safety (OAS): As with CPP, there isn’t a requirement for Service Canada to withhold tax from OAS payments, and you’ll ask for tax to be withheld. Some authorities advantages, comparable to OAS, are means-tested, and could also be topic to a clawback. (Extra on this under.)
3. Registered retirement revenue fund (RRIF): The minimum required withdrawals out of your RRIF (and related tax-deferred retirement accounts) would not have tax withheld. You possibly can elect to have tax withheld, and in case you take withdrawals past the minimal, the monetary establishment has to withhold tax starting from 10 to 30% relying on the quantity withdrawn.

Consequently, most retirees find yourself owing tax.

Why does the CRA ask for revenue tax installments?

If a taxpayer persistently owes tax, the CRA—and Revenu Québec for Quebec residents—might ask for prepayments of estimated tax owing.

For non-Quebec residents, if tax owing exceeds $3,000 in two consecutive years, this triggers a request for quarterly revenue tax installments. These are urged funds of tax for the present tax 12 months based mostly on the 2 earlier tax years.